Finding out how much money you need to invest is an important step in the franchise research process. Here are my top six financial questions to ask when considering purchasing a franchise:
1. What kind of revenue can I expect from this franchise?
Many factors will influence the answer. A range of incomes may be found in the franchisor's FDD (Franchise Disclosure Document), which the franchisor will provide. This information, however, is not required, and the range may be too broad to be useful. Validating with existing franchisees is your best path to get more information on revenue generated by existing franchisees at the brand you are investigating.
2. How much money is needed to start this franchise?
It is critical to know your upfront costs for purchasing and operating the business until it turns a profit. Reading the estimated investment section of the FDD will provide you with general information about these costs.
3. How long will my new franchise take to break even?
During the start-up phase of your business, you may not make money. The important first step is to find out when you can break even. This is when the business is covering its own expenses. It’s important to go in with the mindset that you must first build your customer or clientele, which can take some time for some businesses, then scale to grow the business’ profitability.
4. How much working capital will I require when my business launches?
Working capital is the money you will need to put into your new business after it opens until it begins to earn as much as you are spending. Some items to consider are the following:
- Operating costs
- Your lease
- Cost of employees
- Equipment and utility costs
- Personal living expenses
5. What options do I have for financing my franchise?
There are numerous ways to finance the purchase of a business.
- Bank loan
- ]SBA (Small Business Association) loan
- Borrow money from your retirement account
- Loan from family and friends
- Take on a business partner/silent investor partner
6. How financially strong is the franchisor?
When looking into franchise opportunities, this might not be the first question that pops into your head, but you should still ask it. The franchisees will be supported by a franchise company with solid financial standing.
One of the most important steps in your franchise research process is to get the answers to these financial questions. Then, if the answers satisfy you, you can be confident that you are making the right decision when purchasing a franchise.
If you have questions about what to consider for franchise investment, please schedule a brief call here.